NAFTA trade deal optimism lifts Toronto stocks outlook: Reuters Poll

TORONTO (Reuters) - Gains in Canada’s stock market will pick up over coming months after a modest advance so far this year, a Reuters poll showed, as a potential reduction in trade uncertainty boosts the outlook for its commodity and export-dependent shares.

FILE PHOTO: Flags of the U.S., Canada and Mexico fly next to each other in Detroit, Michigan, U.S. August 29, 2018. REUTERS/Rebecca Cook

The Canadian dollar and shares of Canadian auto-parts manufacturers have climbed this week as investors bet an agreement between the United States and Mexico to overhaul the North American Free Trade Agreement will lead to a trilateral deal that includes Canada.

“A good part of the Canadian market has been depressed because of worries over NAFTA,” said Norman Levine, managing director at Portfolio Management Corp, adding that these concerns should disappear in a short while.

The trade dispute between the United States and China, which could slow global growth, has also held back Toronto's commodity-linked market. The S&P/TSX composite index .GSPTSE has gained a little over 1 percent this year, well short of the 9 percent advance for the S&P 500 .SPX.

A February poll was substantially accurate in predicting these shallow gains and where the index would be at end-June.

Investors said the TSX’s 30 percent weighting in energy and materials shares could work to its advantage should global trade tensions cool and the U.S. dollar pull back.

“I think that the rolling over of the U.S. dollar will be good for commodities,” said Steve Palmer, founding partner and chief investment officer at AlphaNorth Asset Management. “The TSX is heavily weighed in resource stocks, so I expect the TSX to outperform because of that.”

The U.S. dollar .DXY has retreated as much as 2.6 percent against a basket of other major currencies since reaching a more than one-year high earlier this month.

Given that oil CLc1, gold XAU=, base metals and many other major commodities are priced in U.S. dollars, a weaker greenback could increase demand for those commodities because they become cheaper to buy for holders of other currencies.

The median forecast of the 20-plus portfolio managers and strategists polled was a 3.4 percent increase in the Toronto market from where it closed on Wednesday, to 16,950 by the end of the year.

But the pace of gains for the index, which reached a record high of 16,586.46 in July, is then expected to slow. It is seen at 17,500 by the end of 2019.

One impediment to gains next year could be a slowdown in the domestic economy, which has been burdened by near record levels of household debt and is contending with interest rate hikes from the Bank of Canada.

Money markets expect the central bank, which has raised interest rates four times since July 2017, to do so again in the coming months. BOCWATCH

“Going into 2019 we believe the economic momentum in Canada will continue to slow,” said Philip Petursson, chief investment strategist at Manulife Investments. “A relief rally following a positive conclusion to the NAFTA negotiations may help to drive the market higher, but this will give way to the reality of slower earnings growth.”